Jacob Yormak, Partner at Story Ventures, on raising and investing a focused seed fund

Jacob Yormak of Story Ventures - Podcast Transcript

Scott:	Hey it’s Scott Orn of Kruze Consulting and welcome to another episode of Founders and Friends. And before we start the podcast, let’s give a quick shout out to Rippling. Rippling is the new cool payroll tool that we see a lot of startups using. Rippling is great for your traditional HR and payroll. They integrate very nicely. But guess what? They did another thing. They integrate into your IT infrastructure. They make it really easy for when you hire someone to spin up all the web services in their computer, which sounds like not a huge deal, but actually we did the study at Kruze. We spend $420 on average just getting a new employee’s computer up and running and their web servers up and running. It’s actually a really big deal, saves a lot of money and the dogs are eating the dog food. We see a lot of startups coming into Kruze now using Rippling, so please check out Rippling. Great service. We love it. I think we have a podcast with Parker Conrad. You can hear it from his own words, but we’re seeing them take market share, so shout out to Rippling. And now to another awesome podcast at Kruze Consulting’s Founders and Friends. Thanks.
Singer:	(singing) So when your troubles are mounting, in tax or accounting, you go to Kruze Founders and Friends. It’s Kruze Consulting Founders and Friends with your host, Scotty Orn.
Scott:	Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting. And today my very special guest is Jacob Yormak of Story Ventures. Welcome Jake.
Jacob:	Thanks Scott. Thanks for having me.
Scott:	Good to have you. So, Jake and I met via his brother, and you guys work closely together. Do you want to tell the quick story of how you had the idea to start Story Ventures?
Jacob:	Sure. So, we started the firm, I guess it’s about three and a half, almost four years ago now. So, my background, I had actually been a lawyer. I started my career at a firm called Cravath, Swaine & Moore in New York. So, I was doing large mergers, and acquisitions, and capital markets transactions. And I think what was happening in the Bay Area over what’s been happening for the last 10, 15 years started happening in New York, so I actually decided to move from Cravath to a firm called Gunderson in New York where I worked exclusively with early stage startup tech companies. And I was doing everything from formation to financing to corporate governance matters, how to think about intellectual property strategy, how to negotiate complex licensing agreements and all the way through the life cycle of businesses. And Brian, he’d actually found himself at a venture capital firm in Detroit called Fontinalis that was focused on the future of intelligent transportation, so that was everything from self-driving cars to connected vehicles and connected infrastructure to how autonomous systems would impact the movement of goods, whether that was robotics and warehouses or just autonomous software systems impacting supply chain or logistics businesses. And we’d always wanted to start something together. I don’t know if we thought we would start a venture capital firm as much as a company. And if you’re interested, I can get into how we decided to start the firm, but that was our foray into the world of startups.
Scott:	Yeah. So, you had the legal and deal experience and knew how the game is played, right?
Jacob:	Yeah.
Scott:	And is he a few years younger than you or what’s the age dynamic there?
Jacob:	Yeah. He’s four years younger than me. We both went to Penn for college, so we never overlapped but it led me to be there for about eight years in a row.
Scott:	That’s awesome. And everyone knows Gunderson is one of the best firms in first startups ever created, so that was an incredible place to be… The amount of stuff you must have learned there must have been incredible. So, yeah. Instead of starting a company or another law firm or whatever, how’d you have the idea to start Story Ventures?
Jacob:	Yeah. Well, it’s interesting-
Scott:	Why VC firm?
Jacob:	It’s interesting if you even think about Gunderson at the time, I think when I started there, Gunderson was about 30 lawyers in New York.
Scott:	Oh, Wow.
Jacob:	And my recollection is the next largest firm in all of New York focused on startups was maybe five to seven lawyers, so there was nothing.
Scott:	Wow.
Jacob:	It was very, very early. And I remember when I was at Cravath, I was doing mainly multi-billion-dollar deals, and so one of the reasons I ended up at Gunderson was I had a friend who was an engineer at one of the large investment banks in New York who called me and said he wanted to start his own company and asked how to do it. And I remember saying, “If you want to do a $10 billion merger, I can do that. If you want to start a company, I’m not even sure. I think you file for a corporation in Delaware?” So, that was the beginning of getting into the startup world. The story behind Story I guess is, I mentioned what Brian was doing at Fontinalis and we were starting to just see a seismic shift in what technology was enabling, what we sort of call the data stack. So, if you think about how a self-driving car works, for example, you’ve got everything from the sensory systems that are capturing data and creating data, and that can be done whether it’s through sensory systems or software systems that are capturing new data, to the systems that are organizing, aggregating, cleansing and structuring data. So, once you’ve actually captured new data, how do you put it in some format that’s useful? And the systems to do that were improving very quickly. And then the last layer is once you have captured data and you’ve organized it, how do you actually leverage machine intelligence to understand that data and do something with it? So, in the context of self-driving cars, you have computer vision, sort of visual form of artificial intelligence. You have natural language processing, which we were starting to see impacting the legal world a little bit. And you, more broadly speaking, just have normal software that can be applied to newly accessible data assets. So, we were brainstorming about what kind of company to start, and we were seeing a lot of entrepreneurs in New York and outside the Bay area that wanted to start businesses in this vein. And really there were no investors at the time or very few investors focused on what we call this data stack. And we kept gravitating towards wanting to help people start their businesses. And neither of us are technical by nature or by background, even though we have spent, I don’t know how many countless thousands of hours reading about this stuff and working closely with engineers and data scientists. So, we ended up deciding to start a fund, which was no easy thing to do. So, we raised $5 million for our first fund, it took about six to 12 months to do that. We were both working at our old firms at the time, and then we-
Scott:	That’s impressive though. People don’t usually, they think venture capitals just kind of happen, but raising your first fund is really, really difficult. And maybe we can talk about that a little bit later, but $5 million is a really good size for your first fund.
Jacob:	Yeah.
Scott:	Often times it’s like one or two million.
Jacob:	Yeah, it’s a funny thing. It’s both a lot of money and was very hard to do, and it’s also so small compared to all the other funds out there. So, it’s a Herculean feat to do it. And then you do and you’re like, “Oh, we’re like the smallest fund in town.” But we-
Scott:	But once you get going, it’s like you’re in business and then it’s like the George Costanza. The first million’s the hardest million to get.
Jacob:	That’s right.
Scott:	It’s like once you’re in business, that’s a huge, huge step.
Jacob:	That’s right. We sort of knew that fund one would be us building a business, eating into our savings while we did so. Fund two, if we could get there, would be hitting a breakeven standpoint of we’d keep building the firm and we’re there now. But we keep building the firm, we’d pay ourselves enough to really not lose money and build real upside in the firm itself, both in the positions themselves and in the brand equity. And then fund three, which is some future date in time will be-
Scott:	The big one.
Jacob:	…where we really are in good shape. It feels much more like starting a company than a typical fund because I do think a lot of funds are started by people spinning out of other funds that could start with a lot more money. We started with $5 million, really were like founders eating into our savings, building a brand from nothing, and that’s what it felt like.
Scott:	I’m friends with Riley Brennan at Trucks and Charles Hudson at Precursor and actually invested in both of them. And actually, Brian and I, I think one of the reasons we hit it off was because he worked in transportation and Riley works in Trucks. But I saw both those guys do it too, and you’re exactly right. It’s so hard and it is very humbling, right? You can really relate to the entrepreneurs because you guys are both entrepreneurs.
Jacob:	Absolutely. That’s exactly right. And I mean real kudos to someone like Charles who did it on his own too. I don’t think I could have done it without Brian. I certainly wouldn’t have wanted to do it without him.
Scott:	Yeah.
Jacob:	So, I know how hard it is with two of us full time working around the clock to do it. I almost can’t imagine what it was like for Charles and others that are solo GPs to do it themselves, but huge kudos to them for doing it.
Scott:	Yeah, I know. So, you did the five million and then you went on to prove the model out on that five million lead you got going.
Jacob:	Yeah. So, we made 17 investments in our first fund, which is pretty concentrated for a seed fund and we do all pre-seed and early seed, so 17 investments are pretty concentrated. And actually, in the new fund, which is about a $25 million fund, we’re planning to make about 12 to 15 investments.
Scott:	Oh, wow.
Jacob:	So, I mean, most of the seed managers you have on here or you’ve met, they probably do anything between 25 and 50 investments per fund. So, we take a much more hands on approach, which is inherently higher risk, higher reward because we’re making fewer bets, but we are able to truly lead pre-seed rounds and co-leads seed rounds because we take a concentrated approach so we can put more money into each company. But yeah. So, the first fund we made those 17 investments, it was over about three years. It was a mix of hard work and good luck, but a lot of the people that we knew that really were the people behind why we wanted to start the fund to begin with, we’re raising money for their companies at the time. We invested in a company called Petal, for example. Jason Gross, who’s the CEO of the company now has over a hundred people valued in an excess of a $100 million.
Scott:	Wow.
Jacob:	And that was our first or second investment. Jason was my office mate at Gunderson.
Scott:	Oh, my gosh.
Jacob:	So, it was just the two of us in an office while he was starting Petal and we were starting Story. So, we had good luck in that we were surrounded by really smart people. And then we also, to get from fund one to fund two, we had invested in a company called Sayspring in the voice technology space, building prototyping software, sort of what Invision and Marvel do for mobile applications.
Scott:	Oh, no way. That’s interesting.
Jacob:	Yeah. And Sayspring was acquired by Adobe about a year after we invested for a very good multiple on what we invested, and so we were able to return money really quickly to our investors as well.
Scott:	Oh, wow.
Jacob:	And so, I think that engendered a lot of trust from them. And they were our biggest supporters going from five to 25 million, but really the five with their tremendous support turned into like seven or eight, so we still needed to find $17 million somewhere. And what I learned quickly was money doesn’t grow on trees, so it was brutal. It was the hardest thing we’ve ever done in our careers. I think it will be the hardest thing we ever do in our careers. But on the other side, we actually got to sleep last month.
Scott:	Oh. Did you just close the fund just recently? I didn’t realize that.
Jacob:	We closed it right before the holidays so we had January, February and so far, March. And thank God the world is really easy right now. So, we’re just on the beach relaxing.
Scott:	This is informative for a lot of people out there who think they might want to get into venture capital. How long did it take you to raise a second fund, like two years?
Jacob:	I think that we started having conversations with people plus building our fundraising deck, our fundraising model, the beginning of the summer, so maybe May or June of 2018. And we went to our fund one investors from that original $5 million pool over the summer into, let’s say, September, October, and we got pretty much complete universal backing from them for the next fund. And then we started having conversations with new potential investors. A lot of them were introductions from our existing investors, a lot of them were people we just met over the prior one to two years, and then some of them were introductions from other GPs, entrepreneurs. I think in the new fund we have something like six founders from our 17 fund one portfolio companies personally invested in fund two-
Scott:	Oh, that’s amazing.
Jacob:	…which was really, really nice.
Scott:	That’s really great.
Jacob:	Meant a lot, especially because not that many of them had much liquidity and they were very helpful. So, we did a first close right before the holidays in 2018, so that was about a six-month process to get to a first close. I honestly-
Scott:	But at least you were in business.
Jacob:	Right.
Scott:	I mean that’s actually a pretty fast first close.
Jacob:	Yeah. Well, so it was because we have such good backing from our fund one investors and also our first close was just shy of $10 million. So, we had two deals that we really wanted to do and essentially the founder said, “If you want to do the deals, we need to do it before the end of the year.” So, we had a ticking time bomb of we need to get this done, and I don’t think it’s an exaggeration to say that we were working 16+ hour days for the entirety of September, October, and November into December. And we got it though. We got to the first close. We made those two investments, one of which has already raised a series A at over three X the valuation we invested at. So that worked out well, although it’s still very early. And so, we did that and then we spent the rest of the year fundraising. I would say in reality we spent January, February, March still very aggressively fundraising. Meeting with anyone who would take meetings. We exceeded 20 million I think by the end of March, let’s say, or April. So, we’d gotten, at that point, and 20 million was the goal. So, we got there, but then we kept raising, but once we hit 20 million we started really exclusively, not exclusively, but almost exclusively focusing on running the business again, making investments, supporting the founders. So, we very lightly fundraised for the rest of the year, but we didn’t do a final close until just before the holidays in 2019 and that’s when we get to the final amount. So, it really probably was about an 18-month process with maybe nine plus months of that was our job.
Scott:	That’s super helpful for people to know because I do think people just think you kind of snap your fingers and sometimes the people who spin out of a bigger fund can do that. But this is you. You are like a true entrepreneur. Truly built a fund and that’s what it takes. At Lighthouse, we fundraised for like two years.
Jacob:	Yeah [crosstalk 00:15:22], we have 98 investors in the fund.
Scott:	Yeah and that’s, well, it’s a lot. That’s a lot of meetings. The cool thing about that is the breath. That’ll probably serve you pretty well when you go to fund three because those people know people, they’ll be able to talk about you. So, that’s really good.
Jacob:	Yeah. And it makes it more important than ever to do a good job of communicating proactively because, whereas we had a much smaller number of investors in fund one, we were able to speak with them individually over the course of, it’s been three and a half years now, for fun too. Brian and I, neither of us, even if we spent all our time doing it, could really keep 98+ people informed. So, we try and be really diligent about sending quarterly updates that are very detailed. We do now an annual call and we’ll probably also do an annual investor meeting and LP day, which fund one was just too small to do it. We didn’t even have the money to do it, but now in fund two we do. So, we’ll probably do our first version of that in the fall pending coronavirus.
Scott:	You know what’s nice about that though? Pending coronavirus, but everyone getting together, you can invite potential LPs for fund three to your annual meeting every year. And so, it’s actually a really good, get people indoctrinated. The same way that venture capitalists like to follow founders for a while and see how they do, you can do that with fund investors too. The next time it might be at 50 or $75 million fund.
Jacob:	That’s right. We’ll see where we are. This time next year we’ll be starting that process again. So, I think we’re trying to put it off as long as humanly possible and do the part of the job we like, which is working with founders but it will happen sooner rather than later.
Scott:	For sure. Well, let’s cover the data stack and all because that was actually super helpful but also fairly dense so we can break down those three portions of that. And even before we started recording, you and I were talking about a couple of sample companies so we can go over those. And then I’d also just love to get your take on the situation of the macro environment and the coronavirus, all that stuff. But let’s talk about your guys’s approach to the data stack first. So, the first part was just kind of the, I was visualizing sensors and things like that, bringing data in. Is there a part of the stack that you really like to invest in or do you do all three or how do you think about this?
Jacob:	Yeah, so that’s a great question. So, it depends on the industry. So, I think, just like bringing it full circle from what I said before, what we saw was this evolution of the data stack and how it was changing transportation. And we felt that those data technologies wouldn’t just change the face of what transportation looked like, but they would also impact finance and healthcare and real estate and retail and logistics businesses. The way we think about it is a horizontal thesis applied to specific verticals and we tend to focus on vertical technologies within this data stack. So that’s how we think about it. And I can give you examples of companies at each layer and then I can tell you sort of how we think about it from industry to industry. But if you think about where the value is in capturing data, for example, that’s the full stack hardware plus software company. So, we invested in a company called Inspiron for example and it’s very timely given everything with coronavirus. But what Inspiron does is they put sensors above hospital beds and hospital rooms and these are computer vision enabled sensors. So, they capture the video data from what’s going on in a room. So, for example if a patient falls out of bed, right now hospitals have no way of really knowing that that happens unless a patient yells out or is able to still get up and hit the call bell. If patients don’t move in bed for over an hour, patients tend to get bed sores, really bad for patients, also really expensive for hospitals to deal with. So, the technology enables the sensor to autonomously notify a nurse if a patient hasn’t moved over a given period of time. The sensor can also track nurses doing the rounding. So, nurses are supposed to round typically every hour, but that doesn’t necessarily happen. So, were nurses rounding on time? And it actually can be used for positive encouragement. So, what’s happened already, they’re up and running at Queens hospital in New York Presbyterian. And what’s happened is nurse administrators will often see a patient fall or a patient with bed sores and blame the nurse for a job poorly done or rounding or not done in time and Inspiron and has been able to use the data being created by their sensors to actually say no, the nurse and did his or her job and came hourly as expected. And sometimes stuff just happens but this is not the nurse’s fault. So actually, nurses really like this and the bigger picture is how do you capture clinically significant data in an environment? Working with hardware is a lot harder. It’s capital intensive, that’s what people talk about, that’s true. I would say the bigger thing is it’s time intensive. So, if you make a mistake, for example, to fix that mistake takes a really long time. Iterating on the product, even if you haven’t made a mistake, takes a really long time. So, it is capital intensive, partly because the time it takes to improve it and to improve the product just takes longer and time takes money because you need to pay salaries. So anyway, that’s at that first layer of the stack that’s an example. Once you’ve captured the data, then you need to actually aggregate or organize it, structure it. So, Inspiron does really the entirety of that stack. But you probably saw Plaid was acquired by Visa for $5.3 billion. So, Plaid is a really good example of a company that takes existing data, which is the information from your bank account. How much money is going in, how much money is going out, what your routing number is, what your accounting number is, and it actually provides the plumbing to get that information from point A to point B, which are smart, intelligent applications and connected applications, whether those are Venmo or Robinhood or a whole host of other FinTech applications. And you see Plaid has that really valuable leverage spot in the middle. So, we invested recently in a company called Particle Health. Particle Health is a very similar company to Plaid, but in the Electronic Medical Records space. So, if you think about it, you go to a doctor, you get a cortisone shot because your knee is bothering you, or you have certain allergies and you tell the nurse or physician’s assistant or physician about it and they type it into the Electronic Medical Records system, whether that is Epic or Cerner or Allscripts or one of the others. That data is in that system. Those companies, the EMR companies, Electronic Medical Record companies, historically have been very reluctant to share the data. In fact, they won’t do it. But the same thing that’s giving Plaid tailwind, which is called open banking, is happening in the healthcare industry. So, the government, it’s actually very timely, last week passed the regulation or issued a final rule I should say, that is mandating that the EMR companies share patient data if the patient requests that data. So now you think everything going on with coronavirus, if you want to do a telehealth appointment because you don’t want to go into a hospital and you go through a new telehealth application, that doctor or that person, probably a doctor who has never met you before, needs to know your medical history to properly treat you. Right now, that works in a world of facts, believe it or not. That’s how one gets medical records from one place to another. So Particle Health has built a lightweight API that finds you based on your name, date of birth, address and everything else without you needing to remember your username and password for your EMR account that you may be created after you went to the hospital and don’t remember. They find you and they seamlessly digitally transfer that information to the doctor and it’s much less expensive than the faxing status quo and much more efficient. So, Particle Health takes data that exists and is in demand, but there is no way to get it there digitally at the moment.
Scott:	Yeah, well a couple of things. So, I’m a Doctors on Demand guy, I’ve used it many times and so you’re right, I have to give the doctor a lot of feedback and a lot of history on me because I have asthma. I love that kind of stuff. We actually at Kruze, we use Plaid and it automates all, this is like a classic, people think about connecting the bank account. But what Plaid also does is automates the pull down of asset reports or bank statements. And if you’re doing accounting, you have to reconcile against the bank statement. So, Plaid’s actually made us super-efficient, it’s really amazing. And so yeah, I love those kinds of stories, that’s super smart. And you’re right about, you said something pretty interesting which is they’re kind of the middle of that leverage point in the value chain. Plaid has a ton of customers like us and they have a ton of data sources like banks and then Particle Health is going to have all the Doctors on Demand and folks like that. But probably there’ll be some new applications that weren’t available or you just could’ve never built. I think I saw the Epic CEO really battling and not wanting this law to go into effect, so that’s good that it did. But there’s probably a lot of stuff that sophisticated iOS developers and other people can actually do to improve all of our lives using the Particle Health database.
Jacob:	Right. Well, so you don’t really need me on here to figure out all this stuff then because that’s sort of the answer to your other question, which is where do we focus in the stack? So if you think about FinTech for example, because their eight years ago, or I think Plaids about eight years old, but eight years ago when Plaid started, I think Plaid started as a company that was trying to build, let’s say, a budgeting application or something like mint.com and they realized that it was just brutally hard to actually get access to the data and that the value they could create at that time was creating the pipes to get data from point A to point B. And so, if you think about a company like Petal that we invested in, so Petal is that last layer of the stack, which is once the data exists and has been captured, that’s your relationship with the bank, for example. So they’d see your money in, money out of your bank account. And Plaid A exists, which is how to get data from point a to point B, now you have the application ecosystem. So what Petal does is they say, whereas every other credit card company out there underwrites using FICO, which is your base on your credit history, we actually don’t need to do that. Because if you’re a student graduating from college without a credit history or if you are an immigrant moving here without a credit history, you might still be a good borrower. So what Petal does is they say to those people, just come to our website, type in your username and your password for your bank account, we’re going to leverage the pipes of Plaid and other similar data aggregators to see what is your monthly income or your biweekly income, what are your rent payments? And they use cashflow as actually a much better leading indicator or proxy for whether or not they should underwrite a person. Petal couldn’t have really existed about three, four or five years ago because there was no way to seamlessly access cashflow data from everyone in the country without building custom integrations with every financial institution, or without relying on a company like Plaid that does a mix of integrations and screen scraping to pull that information in the finance world. So, Petal is that last layer of the stack. And I’d say some industries are at the first layer, like we talked before the show about agriculture, where it’s still in the data capture moment for a lot of what happens in the agricultural world, how do you actually capture the data? Some like Electronic Medical Records and we invested in a similar company called Motorq, M-O-T-O-R-Q, in the connected vehicle where all the data exists. The thing about cars, for example, cars are now being built with internet connectivity. The data coming off of cars from all the sensors in the cars exists. Motorq is the pipes to get that from point A to point B. So the data exists, but it’s not yet organized. And then once it is, to your point with the healthcare industry, for example, Particle Health can be a great enabler of a flourishing application ecosystem. Motorq can be a great enabler of a flourishing application ecosystem. Plaid has already done that, and you’ve seen a giant expansion in modern intelligent FinTech applications as a result of that.
Scott:	That’s beautifully said. And you know what the other thing is, just kind of building on that, once Plaid has been established now, and this will happen for your other companies, there was banks that weren’t playing nicely with Plaid. So, Chase and Wells Fargo were basically impossible for us to use because of some two-factor authentication, things that Plaid couldn’t solve. And now that Plaid is big enough, has its own customer base, I just got a notice from Plaid, our account manager was saying, “Hey, we now have direct deals with Wells Fargo and Chase.” So, the data is actually going to be a lot cleaner and even more reliable and I’m sure that’ll happen for your other companies. They’ll do that in partnership with the big car OEMs or the big healthcare, the patient data stuff. It’s pretty exciting what’s happening right now.
Jacob:	Yeah, well we’re just scratching the surface because, of even understanding this and what we’re talking about, because different industries get data to point A to point B from point A in different ways. So, screen scraping is what Plaid historically relied on, right, which is you log in and they’re actually just scraping the screen. They do not have direct integrations. That doesn’t work though for Particle Health for example, because you don’t know your username and password for your, one time you visited a certain hospital in San Francisco or you were traveling and visited the hospital, so you can’t rely on users to remember that. You need to have a different way for connected vehicles. The OEMs are the ones that have access to that data. You need to have direct relationships. You can’t even think about doing what Plaid does because, how the hell do you screen scrape data for sensors on a car?
Scott:	Totally, totally.
Jacob:	So, every industry is different and that’s one of the nice things about having invested in similar type companies in different industries is that we get to see what works and what doesn’t work in different industries and hopefully can anticipate that, as well as anticipate the inflection point of when those aggregators exist, such that we can invest in the application of that.
Scott:	Beautifully said, beautifully. Yeah. You’re bringing a real positive impact to your client, the companies you’re investing in because you’re like, “Hey, I saw what Particle Health tried to do here. It didn’t, this is the things that they ran into” or you can tell the automobile companies. So, that’s really cool. Well this has been amazing. Let’s just spend a couple of minutes, I don’t want to take too much of your time, but just on the current, so you guys are flush. You’ve got 25 million bucks, you’re ready to roll. In a weird way, this is, you would never be opportunistic, but this is not a bad time to be deploying a fund. Once we get through this-
Jacob:	It’s good this is a podcast and you can’t see that I’m in my pajamas at my parent’s house to escape Manhattan.
Scott:	And I’m at home because the studio is closed in San Francisco. So, a lot of lives are going to be affected by this, let’s not make light of that. That’s a very serious thing. But just in the pure capital deployment and venture capital ecosystem, how are you reading this with your target cut? Your target clients and portfolio companies are pre-seed, seed, how’s this going to affect that ecosystem?
Jacob:	Yeah, so we just sent a letter to our investors yesterday, so it’s top of mind. I would say the way we broke it down was there are probably four categories of companies that I think are going to really struggle right now. So, one is any company touching the physical world with a retail presence, for example, or airlines or hospitality companies. I mean this is just brutal and there is no way around that. People are staying home and it’s going to crush those companies and I’m particularly worried about the small to medium sized businesses that are not venture-backed companies. The local restaurants and bodegas, and living in Manhattan there are many of those, thousands of those, and so probably more bearish than bullish on what’s about to happen to the overall market and economy just because those companies are already operating on low margins with freshman levels of debt. So, that’s not good. The next group for companies that are servicing those companies, so software companies, which is more what we do, but software companies that are working with airlines, working with hotels and hospitality companies, working with restaurants. We are a little lucky. We have gravitated away, I should say, from companies that are working with very low margin customers because of concerns of what would happen in any kind of economic downturn. So, it’s not an unwillingness to invest in companies working in these industries, but it’s more really looking for major disruption rather than looking for incremental improvement. But one way or another, we don’t really have exposure to that category. But companies that are selling to those industries are really struggling right now. And then for us, I would say the last two categories, one are companies that need to raise money right now. So, once you’re running a business, if you need to raise money, you need to raise money and this was unforeseeable and some companies need to raise money this month, next month, the following month. And this is a really bad time to raise money. And I think the best companies will be able to raise money. It will not be a pretty valuations and there will be many companies that could be great companies that probably won’t make it. And this is when you probably hope that your venture backers have reserve capital. It’s something we do and every one of the best funds does, but a reserve capital and are willing to stand by the founders to give them the extra three, five, seven, 10 months to prove what they otherwise might have been able to prove in this three-month time period that we’re really losing. So companies that need to raise money right now are stuck in a really hard spot. And then the last, which I think is the hardest, are companies that were hitting really big growth points and got used to spending more and more money, maybe even recently raised fundraising rounds and that growth hadn’t caught up with the burn and now the growth isn’t there. Or companies that got used to spending a lot of money in anticipation of being able to fundraise at higher valuations, but the business isn’t where it needs to be and business itself is going to slow down and it’s very hard to pull back on spending once you’ve opened up that flood gate. So, that’s really challenging. I think what happened with WeWork and Uber and Lyft, despite being great companies that are valued at, well now these companies are taking a hit big time right now, but valued at five to 10 billion for Lyft and 20 to 30 billion for Uber. You know those are very successful companies, but the IPOs haven’t gone so well and the business models have been called into question. A lot of founders saw that over the last four or five months and actually had started to tighten the belt prior to this happening. So, they actually, fortunately, at least in our portfolio are going to be able, I think, to weather the storm. But there are a lot that didn’t do that or that were counting on growth coming, so I think they’re in trouble. And then the rest of the market, and this is probably true of like 80% of most venture portfolios, there’s just going to be a softening in spend and in buying behavior. So, I think it’s going to be a very tough three to six months. But for the companies that can come through the other side, I actually think this will make companies stronger in the long run. So those four categories of companies are the ones I think that have existential crises on their hands.
Scott:	Yeah. The last category you’re talking about, which is the ones that got used to spending money or maybe raised a big round and then ramped up, I agree with you though. That’s the hardest time to change your behavior because it’s not operational, it’s also a cultural thing. People are used to doing this, or they’re used to doing that, they’re used to spending money in certain ways and they probably signed a big lease and they probably have a ton of furniture and they’ve you know. So that is really, really challenging. I love what you said about the best funds really stepping up and backing their companies. And I’m glad you guys do that. When you said the amount of deals isn’t huge for a $25 million fund, so that told me you keep reserves which is super important. And it’s maybe the greatest service a venture capital firm can do for their startups, in that you’re there, you don’t want them to depend on you but you’re there for that rainy day. You’ll support them and help them get through the other side because there’s so many good companies that have those problems at some point in their lifestyle, lifecycle. So, for you guys to be there, that’s fantastic, that’s what people should be looking for in their VCs. A supportive VC.
Jacob:	Absolutely. And it’s hard because if you think about it, let’s say a company that had run life through the end of July, for example, and we’re in March. So that gives them another two, three months to hit their milestones. And as the bar to raise a series A has gotten higher and higher, they had a way to go but they could get there. And now we’re losing March, probably April and probably may. So, what are we supposed to do as venture investors when we were supposed to have three additional months of data to see how did they perform? If they needed a bridge, did they get very close at the very least to a series A and now we’ve lost time and it’s not the fault of the founders that this happened. And so, it does create some tricky situations of how do we as investors even evaluate whether the company should get additional funding because we don’t ever want to throw good money after bad. But I’m inclined to think that the founders in whom we believe, if we believe enough in them, that they’ll be able to persevere to show some progress and we will stand behind them to get them to the next stage.
Scott:	That’s fantastic. And like we talked about before turning on the mics, good founders will always start companies. This actually may be the birth of a ton of really great companies. We won’t really see that. You’ll start seeing them very quickly because you’re investing in the pre-seed and just people with an idea probably come to you quite a bit, but the market will start seeing those companies two or three years down the road. But let’s hope that there’s something good that comes out of this and it’s a little bit of positive creative destruction and the next Plaid or the next awesome company that you invested in will come out of this [crosstalk 00:38:04].
Jacob:	I hope so. I think you’re right. I think this will just make everybody stronger in the long run, but it’s going to be brutal in the short term and there are a lot of businesses that are not venture-backed companies too that are going to struggle. That’s my bigger concern broadly speaking.
Scott:	For sure, for sure. Well, Jake, thanks so much for coming by. I really appreciate it. It’s really amazing what you’ve accomplished and I’m looking forward to following you. Maybe just give everyone a way to contact you or how do they reach out to you?
Jacob:	Yeah, if you go to our website, www.storyventures.vc, you can see a little bit more about what we invest in and we’ve got contact information there and we’d love to hear from you, especially any early stage pre-seed or early seed founders that are building data technology companies. And thanks for having me on, Scott.
Scott:	Thank you so much. Take care.
Jacob:	Okay, thanks. Bye.
Singer:	(singing) So when your troubles are mounting, in tax or accounting, you go to Kruze Founders and Friends. It’s Kruze Consulting Founders and Friends with your host, Scotty Orn.

Jacob Yormak, Partner at Story Ventures, on raising and investing a focused seed fund

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